November 29, 2004

The China Outlook

I met with my new partners last night and they outlined to me some of the plans which have netted them a great deal of investor interest, actual cash, and American execs poking them on the shoulder saying "Can we work for you, please?". I have to say that this is one of the most exhilirating weeks I've had in my life.

So the outlook for me taking the position is excellent. The prospects for making a nice pile of Yuan is also very good, and the experience of my partners in China at or near the top of the pile is quite encouraging. One of the commenters at Dresner says that China is a civilization masquerading as a nation-state. That's quite possible. I'm looking at it as a very very large corporation with a set of executives that we all desparately hope know what they are doing.

A couple things are clear, and several other things I'm learning are new. The first thing is that the more you believe in the greatness of a nation being defined by the industriousness of its middle class, the more you will have to admit that China is well on its way to inheriting that mantle from the United States. As a corrollary to that, it should be well understood that the closeness with which we deal with the UK is likely to be replicated after we 'get over' the transition. In this, the era of the global small business, the consequences could be that such a transition will happen without an armed conflict. This is my hope, and quite frankly, my investment.

I imagine that there may still be some purists after a fashion who might suggest that Sony is not an American company or that Toyota doesn't make American cars. And yet I think they would have a very difficult time convincing others that Spiderman is not an All-American film or that the Prius doesn't appeal to uniquely American sensibilities. I hardly think of the Netherlands when I fill up at a Shell station. Who says 'Royal Dutch Shell'? But the reality is that such institutions are deeply engrained in American life. What we eventually got over with the Japanese, we must inevitably get over with the Chinese. And so if and when it comes to banking or military might, that might not be so easy, but at the commercial level, I think we'll handle things just fine.

As a market, the American middle class, rounds out to about 70 million households. In China, those with equivalent purchasing power is about 4 times that. I'm not certain that the current status of the corporation, short of what Wal-Mart has achieved over the past ten years with its brilliant use of information technology, is ready to handle such a market. It's easy to say that the same ideas will work, but I strongly believe that a great number of business plans, and companies organized around such business plans, will not scale. I believe that selling to a global market of say 700 million, there are only a few corporations who are ready willing and able. So as this market of consumers evolves in China, nothing great American corporations take for granted will work of necessity. Nor will businesses born and bred in China necessarily have the magic to handle this expansion. What I think is going to happen is that there will be many companies who are successful initially, but will get slashdotted by too much success. It's one thing when your call center can handle 5 million calls to complain about your product's failure, but what about 50 million calls the next year?

Here's the surprising anecdote. Not 7 years ago, GM built with about $3 billion several state of the art automobile assembly plants. And why wouldn't they make them state of the art? China pays good money. What you don't hear is that now, something on the order of 40% of GM's global revenue (or is it profit, I don't remember) comes from those new plants. When GM went there, they understood that they would be catering to the upscale crowd. So they figured that the Chinese would want Cadillacs. No. The most popular GM car in China for the bling bling set is the Buick. That's what they love. Hmm. Maybe Tiger Woods knew something we didn't after all. Maybe not.

The moral of the story is that the Chinese consumer economy may be as familiar yet as strange as the Buick. Perhaps Pepsi will beat Coke over there. Maybe their favorite NBA team will be the Houston Rockets but because of Juwan Howard, not Yao Ming. Remember that we called it 'space' and the Russians called it 'the cosmos'. Modern China will be the same as, but different from the US. And like two overlapping circles, there will be some that is mutually exclusive, and I think a lot which will be excitingly brand new.

Let's keep one thing in mind, the Chinese, like almost nobody else, want to be like us and better. That means they are heading in the same direction. They don't hate us because we send a few billion to Israel. To them that is a pittance in a pot. They don't hate us at all. They envy our economy and infrastructure and they're working hard to get their own up to speed and beyond. They run their country like a corporation, not a democracy. Right now they're spending. Think about it.

Comments

The China Outlook

I met with my new partners last night and they outlined to me some of the plans which have netted them a great deal of investor interest, actual cash, and American execs poking them on the shoulder saying "Can we work for you, please?". I have to say that this is one of the most exhilirating weeks I've had in my life.

So the outlook for me taking the position is excellent. The prospects for making a nice pile of Yuan is also very good, and the experience of my partners in China at or near the top of the pile is quite encouraging. One of the commenters at Dresner says that China is a civilization masquerading as a nation-state. That's quite possible. I'm looking at it as a very very large corporation with a set of executives that we all desparately hope know what they are doing.

A couple things are clear, and several other things I'm learning are new. The first thing is that the more you believe in the greatness of a nation being defined by the industriousness of its middle class, the more you will have to admit that China is well on its way to inheriting that mantle from the United States. As a corrollary to that, it should be well understood that the closeness with which we deal with the UK is likely to be replicated after we 'get over' the transition. In this, the era of the global small business, the consequences could be that such a transition will happen without an armed conflict. This is my hope, and quite frankly, my investment.

I imagine that there may still be some purists after a fashion who might suggest that Sony is not an American company or that Toyota doesn't make American cars. And yet I think they would have a very difficult time convincing others that Spiderman is not an All-American film or that the Prius doesn't appeal to uniquely American sensibilities. I hardly think of the Netherlands when I fill up at a Shell station. Who says 'Royal Dutch Shell'? But the reality is that such institutions are deeply engrained in American life. What we eventually got over with the Japanese, we must inevitably get over with the Chinese. And so if and when it comes to banking or military might, that might not be so easy, but at the commercial level, I think we'll handle things just fine.

As a market, the American middle class, rounds out to about 70 million households. In China, those with equivalent purchasing power is about 4 times that. I'm not certain that the current status of the corporation, short of what Wal-Mart has achieved over the past ten years with its brilliant use of information technology, is ready to handle such a market. It's easy to say that the same ideas will work, but I strongly believe that a great number of business plans, and companies organized around such business plans, will not scale. I believe that selling to a global market of say 700 million, there are only a few corporations who are ready willing and able. So as this market of consumers evolves in China, nothing great American corporations take for granted will work of necessity. Nor will businesses born and bred in China necessarily have the magic to handle this expansion. What I think is going to happen is that there will be many companies who are successful initially, but will get slashdotted by too much success. It's one thing when your call center can handle 5 million calls to complain about your product's failure, but what about 50 million calls the next year?

Here's the surprising anecdote. Not 7 years ago, GM built with about $3 billion several state of the art automobile assembly plants. And why wouldn't they make them state of the art? China pays good money. What you don't hear is that now, something on the order of 40% of GM's global revenue (or is it profit, I don't remember) comes from those new plants. When GM went there, they understood that they would be catering to the upscale crowd. So they figured that the Chinese would want Cadillacs. No. The most popular GM car in China for the bling bling set is the Buick. That's what they love. Hmm. Maybe Tiger Woods knew something we didn't after all. Maybe not.

The moral of the story is that the Chinese consumer economy may be as familiar yet as strange as the Buick. Perhaps Pepsi will beat Coke over there. Maybe their favorite NBA team will be the Houston Rockets but because of Juwan Howard, not Yao Ming. Remember that we called it 'space' and the Russians called it 'the cosmos'. Modern China will be the same as, but different from the US. And like two overlapping circles, there will be some that is mutually exclusive, and I think a lot which will be excitingly brand new.

Let's keep one thing in mind, the Chinese, like almost nobody else, want to be like us and better. That means they are heading in the same direction. They don't hate us because we send a few billion to Israel. To them that is a pittance in a pot. They don't hate us at all. They envy our economy and infrastructure and they're working hard to get their own up to speed and beyond. They run their country like a corporation, not a democracy. Right now they're spending. Think about it.